The tragedy of small mining coin mining machines: illusory huge profits

In the previous article on mining pitfall prevention, we mainly introduced the pitfalls related to Bitcoin mining. Today we will introduce the pitfalls of small coin mining . Most miners who enter the pit of small coin mining are attracted by the high returns of small coins.

Due to the difference in size, the investment logic of Bitcoin mining cannot be applied to small coin mining . The reason why many people fall into the pit of small coin mining is partly because they directly apply the logic of Bitcoin mining to small coins.

Compared with Bitcoin, small mining coins have common problems such as small computing power, small market value, large price fluctuations, and unstable community consensus, which lay the groundwork for miners to fall into the trap.

01 Unsustainably high returns

Xiao K, who fell into the trap of using a small mining coin mining machine, shared his experience with Zhikuang University.

1. Get started with mining and get a taste of the benefits

Xiao K started mining Litecoin before 2017. He bought two L3+ mining machines and then bought some Litecoins. In December 2017, when the price of Litecoin hit a record high, he sold both the mining machines and the coins. He made more than 8,000 yuan from the price difference of the two mining machines alone. Together with the coins he mined and the coins he stored, he made more than 100,000 yuan in total .

Having tasted the sweetness of Litecoin, Xiao K felt that he had already walked through the road of making money in mining, and decided to continue to participate when the opportunity arose. In early 2018, Bitmain launched the A3 mining machine for mining Siacoin. At that time, it was in high demand, and Xiao K and his friend both grabbed one. At that time, the price on the official website was more than 20,000 yuan per unit. Xiao K felt that the price was too high and the risk was too great, so he gave up buying it. Xiao K's friend paid for it, and when he got the goods, the price of A3 in the second-hand mining machine market had risen to more than 40,000 yuan per unit, and he could make double the profit by reselling it. At the beginning of 2018, it was at the tail end of the bull market, and the second-hand mining machine market was very hot. Xiao K was very upset that he missed the opportunity to make 20,000 yuan.

2. Step into the pit of small mining coin mining machine

In April 2018, Xiao K felt that his chance had come again. A well-known mining machine manufacturer launched a small-currency mining machine, priced at around 17,000 yuan. Xiao K and his friends thought that this would be another opportunity to make money, just like the A3. However, this time the plot took a turn.

Soon, the mining machine manufacturer launched the second batch of the same type of mining machines, priced at only 11,000 yuan, 6,000 yuan cheaper than the previous batch. This caused strong dissatisfaction among the first batch of customers. In order to calm the situation, the mining machine manufacturer refunded 4,000 yuan to the first batch of mining machine customers.

Xiao K revealed that some of the first batch of buyers purchased through scalpers, and scalpers generally do not refund the mining machine manufacturers to the buyers, which is the same as the coupon situation mentioned in our previous article.

3. Short-term and illusory high returns

Mining is a race against time , which is even more evident in the case of the small mining coin. In order to get the mining machine faster, Xiao K ran to the express station in the early morning to pick up the mining machine. At that time, there were not many mining pools for mining this small mining coin, and the addresses publicly given by some mining pools could not be linked. Xiao K accidentally tried the factory test address and found that it could be mined. Because the mining difficulty was very low, the income on that day was more than 1,000 yuan .

With the continuous influx of computing power, the income of mining machines has dropped from more than 1,000 to a few hundred yuan. Xiao K predicted that the high income of mining machines might drop precipitously in the future, and wanted to find an opportunity to sell them. He contacted buyers who were willing to bid 17,000 yuan per unit. But Xiao K's friends thought that they could mine a few hundred yuan a day, and the income was too considerable. If the price of the currency rose a little more, they could get their money back in less than a month, so they were unwilling to sell the machines. Xiao K put his mining machines together with his friend's. He was busy with work at that time, so he gave them to his friends to take care of, and let his friends deal with them.

As the difficulty of mining increased, the daily income of mining machines was shrinking. Not long after, a team cracked the mining algorithm of the small currency, and ordinary computers could mine it. The huge profits of mining machines only lasted for a few days, and the income of mining machines plummeted. From more than 1,000 yuan a day to only a few yuan a day, it took only ten days .

Later, the price of the currency fell and computing power with lower mining costs poured in, causing Xiao K's machine to become scrap metal. Xiao K, who has a good attitude, joked that he would use it to blow air when he was grilling at home.

4. Review

Afterwards, Xiao K reviewed the situation and found that he spent 17,000 yuan to buy a new machine, and the manufacturer refunded 4,000 yuan. The total mining income was about 2,000 yuan, and he lost more than 10,000 yuan for one machine . What was the problem? Xiao K thinks there are the following points:

1. Information asymmetry . When small mining coins were first launched, the mining difficulty was low, the coin price was high, the daily income was high, and the theoretical static payback period was short. However, it was difficult for small miners to grasp key information such as how many manufacturers were developing or mass-producing mining machines, and how much the mining cost of the next generation of mining machines would be. In the case of huge asymmetry in these key information, blindly participating is a very irrational and foolish behavior.

2. The computing power is too small. Adding dozens of mining machines may double the computing power and halve the profit. Buying a small mining machine actually contains huge risks.

3. The market value of small mining coins is very small and can be easily manipulated. After the mining machines are sold at high prices, the price of the coins is manipulated to fall, and the machines are turned off and become scrap metal. Retail investors have no choice but to sell the machines at a low price, and the machines return to the hands of the dealer at a low cost; or other teams develop mining machines with lower mining costs, causing the original old mining machines to become useless scrap metal.

02
Risks of Mining Machines for Small Mining Coin Futures

Regarding the mining of small coins, Hu Yufeng of Panda Miner shared his views with Zhikuang University.

It is very easy to fall into the trap of newly released small-currency mining machines with super high daily returns. Facing the temptation of such super high returns, we need to be calm and rational . When small mining machines are first released, the computing power is very small, and the super high daily returns are likely to attract market attention, and the price of the currency is likely to be pulled up.

Some mining machine manufacturers will control the number of mining machines in the first batch, which is a bit like hunger marketing. The market speculation will lead to a large bubble in the price of mining machines. The risk of entering the market at this time is very high.

After the mining machine is developed, it is no different from other industrial products and can be produced continuously. Artificially created scarcity is not real scarcity . The high returns of small mining coins in the early stage are largely due to market speculation and artificially created computing power scarcity. This high return is extremely fragile. As long as hundreds of mining machines are put on the market, the returns may fall off a cliff.

For manufacturers, there are risks in developing and producing small-coin mining machines. In order to avoid this risk, mining machine manufacturers may adopt the method of selling futures to lock in the price and pre-sale quantity first, so that the risk is passed on to the miners.

Once the delivery is delayed, it is a big loss for the miners. Not long ago, a small mining coin appeared. When selling mining machine futures, the daily profit was more than 300 yuan. After the first one or two days of receiving the mining machine, the daily profit was only more than 100 yuan. After that, the profit was getting worse day by day, and it dropped rapidly. The earlier the time, the smaller the computing power scale, and the higher the mining profit . Delayed delivery means missing the period with the highest profit.

The risk of delayed delivery comes from several aspects:

1. If you buy a second-hand mining machine from a scalper, during the high-yield period, the scalper will not send you the machine, but will mine first, and then give you the machine when there is no profit from mining;

2. Multiple mining machine manufacturers are developing mining machines for the same small currency. If the mining machine manufacturer you place an order from lags behind, you will miss the period with the best profits.

After the professional mining machines for small mining coins are developed, it is very common for the computing power to grow exponentially.

▲HNS computing power surged, from 37T on June 22 to 477T on July 14, a nearly 13-fold increase in 22 days. Data source: https://shakescan.com/mining

03
Small mining coins have the risk of modifying the mining algorithm

Some small mining coins have the risk of forking due to weak consensus foundation . For example, the previous mining algorithm of Ravencoin (RVN) was X16R. Later, FPGA mining machines for this algorithm were developed, which would inevitably make RVN miners more centralized. In order to resist FPGA mining machines, developers modified the mining algorithm.

In order to prevent the FPGA mining machine from being scrapped, miners forked Raven Classic (RVC) from the original mining algorithm. For miners, this is also a last resort. At present, the liquidity and mining income of RVC are far inferior to RVN. After the RNV fork, the payback period of the mining machine will be far longer than expected .

04
Summarize

In general, buying a mining machine to mine small coins is very risky . Compared with mainstream coins such as Bitcoin and Ethereum, the mining market of small coins is not mature enough, which is mainly reflected in the following aspects:

1. There is a huge asymmetry in key information, and it is often irrational and foolish behavior under market hype. The theoretically calculated super-high daily returns are actually very fragile, short-lived and illusory.

2. When small mining coins were first launched, the computing power was very small . Adding dozens of mining machines could double the computing power and halve the revenue. The competition between mining machine manufacturers has a huge impact on miners' revenue.

3. The market value of small mining coins is small and easy to manipulate. After the mining machine is sold, the coin price may drop sharply, or even break through the shutdown coin price, so small miners have to sell at a low price.

4. The consensus foundation of small mining coins is not solid, and forks may occur, and the mining machines may become scrap metal.

In view of the above situation, ordinary miners should try not to buy small-coin mining machines for mining. The static theoretical income and payback period for small-coin mining not only have no reference value, but are even harmful information that induces people to fall into the trap.

It should be noted that FPGA and graphics card miners have better adaptability than ASIC miners. After a certain currency modifies its algorithm, FPGA and graphics card miners still have the opportunity to mine other currencies, which can appropriately reduce the risk. ASIC miners for small currencies have poor adaptability and higher risks. Of course, veteran miners who have a very comprehensive grasp of industry information have the opportunity to profit by taking advantage of information, but this situation is not within the scope of this article.

Have you ever fallen into the trap of mining small coins? Feel free to share in the comment section.